Hello, everyone, and welcome to the Second Quarter 2023 Yum! Brands Incorporated Earnings Conference Call. My name is Emily, and I'll be coordinating your call today. [Operator Instructions] I would now turn the call over to Jodi Dyer, Vice President of Investor Relations. Please go ahead, Jodi.

Thanks, operator. Good morning, everyone, and thank you for joining us. On our call today are David Gibbs, our CEO; Chris Turner, our CFO; and Dave Russell, our Senior Vice President and Corporate Controller. Following remarks from David and Chris, we'll open the call to questions. Before we get started, please note that this call includes forward-looking statements that are subject to future events and uncertainties that could cause our actual results to differ materially from these statements. All forward-looking statements are made only as of the date of this call and should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our filings with the SEC. In addition, please refer to our earnings release and relevant sections of our filings with the SEC to find disclosures, definitions and reconciliations of non-GAAP financial measures and other metrics used on today's call. Please note that during today's call, all system sales growth and operating profit growth results exclude the impact of foreign currency. For more information on our reporting calendar for each market, please visit the Financial Reports section of our website. We are broadcasting this conference call via our website. This call is also being recorded and will be available for playback. Looking ahead, our third quarter earnings will be released on November 1, 2023, with the conference call on the same day. Now I'd like to turn the call over to David Gibbs.

Thank you, Jodi, and good morning, everyone. At our Investor Day last December, we shared our long-term vision for Yum! to deliver accelerated global growth. I am proud to say that our second quarter results are further evidenced by our ability to execute against this vision. Through Yum!’s differentiated capabilities our bold restaurant development engines including 1,025 gross new units in the current quarter, and our distinctive digital capabilities, which drove record digital sales fueled the second quarter’s 13% growth in system sales. I'm especially pleased to report that based on our strong year-to-date results and the continued momentum we see in our business, we expect to deliver full year 2023 results, well above our long-term growth algorithm. I'll cover the few high-level thoughts on our second quarter results before sharing some additional details through the lens of the relevant, easy and distinctive brands, and unrivaled culture and talent pillars of our Recipe for Good Growth framework. Chris will then provide some additional color on our second quarter results, followed by an update on our bold restaurant development and unmatched operating capabilities, Growth Pillars. For the second quarter, we delivered same-store sales growth of 9% and unit growth of 6% with KFC setting the pace with a remarkable 19% system sales growth on the foundation of our industry-leading development momentum, distinctive marketing campaigns and relevant new product layers, such as the launch of original recipe hand breaded chicken nuggets here in the US. And as I'm sure you've all heard, Taco Bell, in partnership with another global icon, LeBron James successfully liberated Taco Tuesday in a way no other brand could mimic. As we also discussed in December, our Recipe for Good Growth strategy will be powered by digital and technology. Our distinctive digital capabilities, which enable easier experiences and…

Thank you, David and good morning, everyone. Today, I'll discuss our second quarter financial results and our bold restaurant development and unmatched operating capability growth drivers before turning to our capital strategy. I'll begin with our second quarter results. We delivered 13% system sales growth, driven by 9% same-store sales growth and 6% unit growth. Digital sales improved at all four of our brands with total digital sales up nearly 30% year-over-year. Core operating profit for the quarter grew 12%. Taco Bell store level margins were an impressive 25.6%. We continue to expect full year Taco Bell company-operated margins to be similar to margins in 2022. Taco, Bell's ability to deliver such strong margin performance, despite mid-single-digit inflation, once again demonstrates the power and resilience of their business model and preserves their compelling unit economics, which remain near an all-time high. For Habit, company-operated margins improved to 11%, thanks to better leverage of Yum!’s purchasing scale, as well as efforts to improve store level labor productivity. We're encouraged with the margin improvement progress at Habit and we’ll continue to invest in the long-term growth of the business and as a result, we expect a small operating loss for the division this year. Ex-special general and administrative expenses $280 million, in line with our expectations. The Ex-special tax rate for the quarter was 18%. Finally, our second quarter EPS, excluding special items was $1.41 per share. Second quarter EPS was positively impacted by unrealized investment gains of $0.09, relating to our investment in Devyani, offset by a negative foreign currency translation impact of $0.05. Given our strong first half results, and continuing momentum into the second half of the year, I'm happy to report that we expect on a full year basis, to over deliver on all components of our long-term…

[Operator Instructions] Our first question today comes from the line of Dennis Geiger with UBS. Dennis, please go ahead. Your line is now open.

Great. Good morning folks and thank you. I wanted to ask a question on the 2023 outlook commentary for growth well ahead of the low double-digits. Could you touch, maybe a bit more on the momentum that you spoke to heading into the second half including any sort of visibility that you have into the top-line, which I think is particularly encouraging in the current environment? And then, any additional puts and takes to profitability beyond the helpful callout that you mentioned on the call? Thank you.

Yeah. Look, as far as the second half of the year, obviously, we're confident. We're well above algorithms. We confirmed that in our prepared remarks, just to give you a little visibility in why we feel that way, Taco Bell U.S. for example has got very strong momentum as we come into Q3. They've launched value. And if we look at all of our businesses on a two-year sales trend, which I think evens out some of the anomalies. We see basically a continuation of what we saw in the first half of the year.

And then, Dennis, on the profit trends, we mentioned that we now expect full year core operating profit to be low-double-digits. And I think we gave a lot of color in my comments earlier on the drivers of that around G&A and expectations in the back part of the year continuing trends from the first half in Q3 and then a year-over-year decline in Q4. We're also pleased to have improving margins in our company operated store based. You saw a 200 basis point improvement there in our biggest - driven by improvements in our biggest store bases and we're going to continue to manage that. I don't think there's anything else to call out in terms of color on back part of the year.

Our next question comes from the line of Brian Bittner with Oppenheimer & Co. Brian, please go ahead. Your line is now open.

Thanks. Good morning. You've consistently said that Yum! brands is built to showcase blue chip like resiliency, positioned to win in any environment and that dynamic seems to be proving out with 9% same-store sales growth in the second quarter. And you seem to be pointing to a continuation of healthy trends. Can you just help us understand what the drivers currently are for this resiliency? And if you believe the macro has indeed become more challenged recently across your portfolio despite obviously, continuation of very strong results?

Sure. And I appreciate the commentary. Just, as far as, why are we able to navigate this kind of environment? Look, I have a lot of confidence in our brand leaders and our marketing teams around the world in so many ways we're writing the playbook for how to build brands in this industry. We have Collider which is an internal group that provides so much to us in terms of our - the inside time and consumer behavior. And I think that'll just shows up in the way we build these brands being top 100 brands in the world. As far as the macro challenges, this is an environment that I would say is a more than normal operating environment. We've come out of a series of years where things have been a little bit more different than we've ever had in the past. But I wouldn't, call it a difficult environment to operate in. One way to think about it is, just to breakdown, our markets between developed and emerging. In the developed markets, we saw mid-single digit sales growth is quarter. It's a stable positive environment and we're past really inflation peak in most markets, obviously, in the US that's been well documented. And this is an environment where we can succeed. Value is rising in importance. But we have solutions and in many ways, our leaders with our brands. KFC for US, for example, in the quarter, their most growth was seen in their low-income consumers, because they had always on value for the quarter, as I mentioned in my prepared remarks. So we can win in this environment and develop markets. Similarly, Western Europe has been documented as a challenged environment for a lot. For us, we had good results there. Our French and German markets did a great job of mixing innovation and value, and delivering strong growth there. So, developed markets, little bit more of a return to normal, more stable and our brands are built to win in those markets. In emerging markets, it's a little bit of a different story. We're seeing double-digit sales growth for the quarter. Little bit more vary, but in general, we're not past the peak of inflation in a lot of these markets. So, we're still taking pricing some of these markets over that inflation, able to pass it on to consumers. But very importantly, we've got positive transaction growth in those markets. So, we're still growing our share in the industry, at the same time, we're navigating a little bit more challenging environment in those emerging markets. But when you add it all up, as you said, we've proven to to demonstrate how resilient our brands are and how we can operate really in any environment and win.

Our next question comes from the line of Jon Tower with Citi. Jon, please go ahead. Your line is now open.

Great. Thanks for taking the question. I want to zero in on the commerce platform that you're expanding across number of the brands including Taco Bell now and some of the others that across the globe are hopping onto the platform. Does the company collect any sort of fees from franchisees hopping onto this platform? And if so, how should we think about it rolling into the P&L over time?

Yeah, Jon, we are excited about the progress that we're making on all aspects of the digital strategy. And so, you're asking about the e-commerce platform, which is a core part of our Easy Experiences capability set. And we talked about some of the benefits that we derive whenever we platform systems like this. We think it really, ultimately drives faster profitable growth for our franchisees and for us the ways that you do that, we talked about the Diablo 4 experience in KFC U.S. It allowed us to implement a marketing campaign much faster than we normally would. And, of course, as you get that platform, across more markets, across more brands, we talked about the big milestone, implementing in Taco Bell, you then are able to implement campaigns in multiple geographies or multiple brands much more quickly, because you don't have to build integrations for each discrete technology platform that we've had previously across the business. In addition, you've got this robust capabilities. At the base as you build tailored front-ends that are relevant to each market and brand on top. So at the end of the day, we're driving profitable growth for our franchisees and for us through this strategy, franchisees obviously benefit from that and they share in the investments that we make through our digital fees that we have in certain markets. But at the end of the day, if this is an ROI driving move for both our franchisees and for us.

Our next question comes from the line of John Ivankoe with JP Morgan. John, please go ahead. Your line is now open.

Hi, thank you. Obviously, quick service in the US and in Europe has been driven by a very high amount of average ticket increase over 2019, at least. And a lot of that has been price but also the consumer trading up on the menu larger sizes. What have you premiumization, there's been a lot of different factors of that. I was wondering if you, kind of see - I don't know if I want to see risk or opportunity for kind of an unwind of that to some extent. Obviously, quick service over time is firstly the franchisors of quick-service have been very focused on driving incremental transactions, because it's very rare where an incremental transaction doesn't drive incremental profit. So, do we have an opportunity, I guess over time to kind of think about a higher transaction-driven model, higher dollar profit-driven model that actually might sacrifice percent margin. I mean, it's we came off a such an unusual period, ticket growth over the next four years. I am wondering kind of how you see the future in terms of the direction of ticket and transactions?

Yeah, thanks for the question, John. You're absolutely right. Obviously, one of the first things that got disrupted in the pandemic was sort of transactions and ticket size. The one thing I would add to the list as you mentioned is also party size. As we became much more of an off-premise delivery business, we did see a number of parties per ticket go up. So that neither translated to a slight decline in transactions, but not in the number of eaters in our business. But the great news is for this quarter, we had good transaction growth in our businesses. And that's what I when I was talking about a more return to normal. We are seeing more individual meal occasions let the party sites go back down which I think it's just the reality of coming out of the pandemic. And our business is growing transactions and growing share all around the world. So, I think you're probably right. We're going to get back into that kind of environment and that just not to sound like a broken record, but I feel like we're winning playing that game.

The next question comes from David Palmer with Evercore ISI. David, please go ahead. Your line is open.

Thank you. What's alike in the quarter with the unit growth, the KFC results, that the 30% digital sales growth too. I'm wondering, though I know there's going to be some curiosity about Pizza Hut, particularly in the US. And then just maybe a comment about whether you see this thing - this division being an ongoing stable same-store sales grower. I wanted to ask because a lots happened and there has improved marketing, innovation like Melts, the third-party delivery, the systems and a lot more profitable today, but big competitors now doing business with third-party delivery and comps were slower in the quarter. So, also I'm sure there's going to be some curiosity about how you think the brand will do in a slowing economy. So, any sort of thoughts about how you think that brand is positioned well, to be an ongoing same-store sales positive brand? Thanks.

Great. Thanks for the question. I'll take the first and then I'll let Chris talked about the aggregator landscape. First of all, on Pizza Hut, big picture, 7% system sales growth in the quarter is on algorithm. There you can see our nice contributor to Yum!’s overall growth and really importantly, they're gaining share in the category. If you do the numbers on relative to some of their peers. So, we love what’s going on at Pizza Hut. And a lot of that is the leadership team, Aaron Powell, and the team that he's built leading that brand are doing a lot of things differently. You're seeing them innovate with things like Melts, which is bringing in a lot more individual occasions, accessing incremental business for us. The other thing about the way they're operating, which gives me a lot of confidence in the future is, we're able to run brand like a global brand. That hasn't always been the case. So what you saw with Melts for example, is they are now already in over 50% of the stores around the world. That's sort of unprecedented for us to be able. You want something in the US, it works pretty well, but every market got their own challenges. You got supply chain challenges. You got different business cases. But they've got the whole world united sharing data, sharing best practices and that is only leading to a stronger business for us at Pizza Hut. So, we I think we're pretty happy with where we are at pizza, particularly when you're on algorithm and gaining share, that's a pretty good starting point. I'll let Chris talk a little bit about that aggregator space and how we're thinking about the competitors there.

Yeah, look, on the aggregator front by zoom way out at a Yum! level, we're very pleased with our aggregator approach around the globe and the result that's produced in each of our brands and in large number of markets around the globe. In Pizza Hut, and specifically in Pizza Hut US, we implemented last year and we've been pleased with the incremental customers that we found on the marketplaces and the incremental delivery capacity that we've been able to utilize when needed. Of course, keep in mind, this was always our strategy. I wasn't here in 2018 when the leadership team started this aggregator strategy. But recall that, we knew that team knew that aggregators would have an impact on the industry. We wanted to be where the customers wanted to transact with us and we made an investment in one of the aggregators that gave us a front row seat to understanding how this space would evolve. And remember, it was our Pizza Hut CEO who actually sat on the Board of that aggregator. That experience helped to define our strategy. We always intended to implement in Pizza Hut and it's gone as planned. And of course, going forward, we think we have some differentiating capabilities that will help us sustain our competitive advantage in pizza with the aggregators. One of those is Dragontail, which helps to optimize the delivery operations in our restaurants including our interface with the aggregators, plus, we've got some first-mover advantages around marketing expertise and talents in that space that we think will help us continue to drive that business going forward in Pizza Hut.

Our next question comes from the line of Brian Harbour with Morgan Stanley. Brian, please go ahead. Your line is now open.

Yeah. Good morning. Thank you. I just wanted to ask about some of the kind of cost trends that your franchisees are seeing. Obviously, we can kind of see your company store margins. Be curious if that’s also true for a lot of your franchisees on food cost? Is some of that favorability starting to show in other markets? Or do you think that'll be more about 2024 as they sort of past weekend placements?

Yeah, good question. Our focus is on ensuring that we always providing strong relative value to our customers. And that our franchisees always have strong unit economics in the long run. That second piece of course is a key driver of our differentiated development capability. If we think about where unit economics are around the globe, they are still very strong. Now from a market-to-market standpoint, you've got puts and takes in terms of the timing of when inflation is hitting the market. The nature of it. In developed markets, we believe we're past the point of peak year-over-year inflation. And that's part of what David was mentioning in terms of a return to a more normal operating environment. In some emerging markets, that those inflationary ways were a bit delayed relative to developed markets. But in all markets, we are using our scale to offset as much of those inflationary pressures as we can. We're optimizing business model with the franchisees and of course, we use pricing as needed to help ensure the unit economics remain strong while still providing that strong relative value. You think about our development results in the quarter up to 1,025 units open. That's the best evidence that unit economics remain strong. Our 3C franchisees continue to put their capital to work.

Operator, we have time for one more question, please.

Thank you. Our final question today comes from the line of David Tarantino with Baird. David, please go ahead. Your line is now open.

Hi. Good morning. My question, Chris, is on the G&A outlook. I was wondering if you could, I think you gave us an actual dollar number the last time. I was just wondering, if you could maybe clarify what that number looks like now with the higher bonus accruals? And then, I guess secondly, just as you think longer term about G&A, if you could just update us on your thoughts on where that should sit on a long-term basis as a percentage of system sales. That would be great. Thanks.

Yeah, thanks, David. Overall, on G&A, we take a lean philosophy. We talked about that before and that implies that we will invest in areas that drive long-term growth, help in the business and we're going to be efficient on everything else. We came into the year that was - with a plan that was consistent with that philosophy. That plan is largely intact. But as we said in the back part of the year, we will see modestly higher G&A relative to that initial plan. And the primary driver of that is higher incentive comp owing to our strong performance. Of course, as you think about next year, that incentive comp resets each year. But that's been the primary driver on the change in the plan. We talked earlier about the color on the back part of the year around Q3 looking similar to first half and then a year-over-year decline in Q4. But net-net it’s on the full year we expect G&A leverage and of course, our long-term algorithm implies G&A leverage in the business. So, I think it's - that gives you a pretty good picture of how we're thinking about it and how the results are playing out.

Thanks Chris and I'll wrap up. I do want to thank everybody for being on the call and just reiterate, this was another really strong quarter for Yum! with widespread growth all brands contributing, system sales at all of our brands were 100 above algorithm and that 19% percent system sales number at KFC is something to be proud of. And we're doing, we're getting those results the right way. It's all about the digital growth, the development, our franchisees being profitable, and a lot of that comes back to the talent that we have at Yum! I was pleased to announce this quarter that, Sean is taking over for Mark. Very few companies have that kind of talent in place to just step in and we know we won't miss a beat and he'll take the business to a higher level of Taco Bell. I will share one fun stat with you if you haven't done the math on this, just in the last two and a half years, we have added 10,000 new gross unit to the Yum! system. That's nearly 20% of our stores were built in the last two and a half years. Do you think about our brands with 60 plus years operating history, but they couldn't be more new and fresh to consumers and they couldn't really be performing any better if you think about the results for the quarter. So, truly astounding. I want to thank all of our team members and our franchise partners that helped bring that growth to life every day. And thank you all for being on the call.

Thank you, everyone, for joining us today. This concludes today's conference and you may now disconnect.